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Fiduciary Links: At 5-Year Mark of Lehman Bankruptcy, SEC Still Under Close Hill Scrutiny

Posted by Duane Thompson on September 16, 2013

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>>>On September 15, 2008, Lehman Brothers filed for Chapter 11 protection from bankruptcy, triggering a financial meltdown and global crisis that reverberates today.  As the news media reprises the five-year anniversary, it seems the SEC is ready to move on, although House Republicans don’t seem as ready.

For one thing, enforcement cases from the financial crisis are drying up due to the five-year statute of limitations clarified by the U.S. Supreme Court this February in Gabelli v. SEC.  In the Court’s words, the “five-year clock…begins to tick when the fraud occurs, not when it is discovered.”

For another reason, at least for the SEC’s Division of Investment Management, the backlog of Dodd-Frank rules has abated; although others remain in the pipeline for federal regulators, such as the Volcker Rule, IM is done.  In what may have been a coincidence, on the same day IM Division Director Norm Champ was talking to a crowd of hedge fund managers about plans to more closely monitor hedge fund activities, the House Committee on Financial Services wrote a strongly worded letter to SEC Chairman Mary Jo White suggesting the SEC back off from private fund examinations

According to Committee Chairman Jeb Hensarling (R-Tex.), and Subcommittee Chair Scott Garrett (R-N.J.), the SEC has been sending conflicting signals on the role of private fund regulation, and whether funds pose systemic risk of the kind that caused the 2008 crisis.  Instead, the Republican leaders not too delicately suggested the Commission would be better served stepping up its examination of retail investment advisers, many of whom “provide investment advice to investors who are often less sophisticated and have fewer resources to conduct due diligence” on the quality of the advice they receive. 

The congressmen gave White eight days to respond.  Hensarling’s committee recently passed a bill that would exempt a segment of the hedge fund advisors current registered with the SEC.  Private fund advisors comprise nearly one quarter of all SEC-registered advisers, and manage $4.6 trillion in assets.

In the meantime, securities regulators are expanding their interest in titles used by financial advisors beyond those marketing specialized senior expertise.  On September 11th, the SEC and state regulators released a bulletin warning investors to ask questions about their title and what the adviser had to do to obtain it.  The “requirements for obtaining and using these titles vary widely, from rigorous to nothing at all,” the bulletin said.

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